Definition of accounting
Accounting is the systematic recording and analysis of financial transactions
of a business. It is a service that provides the facts needed to make informed
economic decisions. It involves recording and summarizing an
organizations transactions or business deals, such as purchases and sales,
and reporting them in the form of financial statements.
Bookkeeping: many people confuse accounting with bookkeeping, which is
only a small subpart of accounting. Bookkeeping is only the beginning of the
accounting service and it is the day-to-day recording of financial transactions.
Accountants use that information in preparing financial reports on which
decisions are based.
Definition of finance
It is the study of concepts, applications and systems that affect the wealth of
individuals, companies and countries over a short and a long-term.
Jobs in Accounting
Trainee accountants: accountant who are studying for professional
examinations
External auditors: people employed by an outside firm of accountants
and fired by a company to inspect its accounts
Bookkeepers: administrative staff responsible for processing the
records of a businesss financial activities
Back-office manager: person in charge of the staff responsible for
giving administrative support to the Finance department
Internal auditors: employees of a company who are responsible for
inspecting its accounts
Controller/comptroller: person who supervises the quality of
accounting and financial reporting of an organization
Tax accountant: an accountant specializing in a companys tax affairs
A BIT OF HISTORY
Accounting had its origins in the Egyptian era. The system applied was known
as single-entry accounting because people used a single list enumerating
the assets that they owned.
However, many centuries later during Renaissance, a new system emerged in
North Italy: the double-entry accounting system. Two entries were used,
and both the assets that a person had and the assets that a person owed were
listed on that each entry respectively.
Double-entry accounting: it is used nowadays to record all the transactions
entered into by a business entity and it must have at least two accounts: one
on the left-side and another on the right-side.
Account: it is the most important concept of accounting/the basis of
accounting because it is impossible to organize all the financial information
without an account. When a company is created, all the names of the accounts
that are going to be used to record all the transactions must be taken into
account. No one can use an account that does not appear on the chart of
accounts (plan de cuentas).
USERS OF ACCOUNTING INFORMATION
Financial reports are used by managers, investors, creditors, etc. But the
principles underlying the gathering and presenting of accounting information
are basically similar for all economic entities.
ECONOMIC ENTITY: an organization that provides products or services. There
are two types of economic entities:
Internal financial reports are prepared exclusively for the use of the
management group in order to help them make operating decisions to
meet the businesss goals. The management group needs much more
detailed accounting information in addition to its general-purpose
financial statements, to operate and control the business effectively and
efficiently.
The area of accounting that is concerned with the preparation and
presentation of INTERNAL REPORTING is referred to as
MANAGEMENT ACCOUNTING. These reports are for the exclusive use
of the management group. As the purpose of these statements is
internal planning and control, they will usually contain budgets,
strategies to reduce the cost of producing a certain item, the cost of
leasing an item, etc.
There is a need for some ground rules that all companies throughout the world
will apply when publishing financial statements. These ground rules used by
business entities in presenting financial information are called generally
accepted accounting principles (GAAP).
Financial reports must be prepared in specific ways so that they are reliable
and comparable. This is achieved by the use of GAAP.
These principles have been developed by the accounting profession over the
years to provide a consistent system of financial reporting in a constantly
changing business environment. GAAP encompass not only principles but also
various procedures for their application. For example, one accounting principle
holds that the price paid for a machine must be spread over a period of time,
the expected life of the machine. There are several accepted procedures for
applying this principle. But once a procedure has been selected, it must be
applied consistently over the years.
Accounting principles often change to meet the needs of emerging
and changing financial situations, so reports that provided adequate
financial information several years ago may not be adequate today.
Accounting principles are a blend of theoretical principles and
practical considerations. A theoretically sound solution to a particular
accounting problem may have certain practical limitations. The experience of
the members of the accounting profession will determine when a practical
rather than a conceptual solution to a problem is required.
Major developers of GAAP
The main agencies/groups that have been influential in developing generally
accepted accounting principles for the entire accounting profession are:
It was the group responsible for originating GAAP. These generally accepted
accounting principles. Called Statements of the Financial Accounting
Standards Board, must be followed by all business entities that issue
financial statements.
The European principles/standards are the mainly used nowadays.
Development
In 2001, the first agency that begun with the development of standards or
principles was the International Accounting Standard Committee (IASC)
or the International Accounting Standard Board (IASB). The standards
developed were the International Accounting Norms (IAN) Normas
Internacionales de Contabilidad (NIC).
Then, the FASB came into existence and it developed the International
Financial Reporting Standards (IASB). These European standards are
widely applied worldwide Normas Internacionales de Informacin
Financiera (NIIF).
There are 5 basic and very important accounting principles that govern the
preparation of financial statements:
1. The cost principle: This principle specifies that assets acquired by a
business entity are to be recorded at the exchange price paid for
them. The price the buyer pays in exchange for an asset is known as the
historical cost, because once recorded it remains unchanged. It is
important to realize that the assets listed on the balance sheet are
measured in dollar amounts that represent the historical cost of those
assets, not what could presently be obtained from their sale.
2. The objectivity principle: The cost of an asset is established by an
exchange transaction between an informed buyer and an informed seller.
This principle requires that any independent party can confirm
the assets exchange price its historical cost- by simply
reviewing the information in the sale documents (such as
purchase invoices, sales invoices, property deeds and transfers of title).
The objectivity principle, which is based on and backed up by the sale
documents, establishes the reason for the cost principle, which is
recording the assets at cost.
3. The business entity concept: This principle establishes that a
business entity is considered to be separate and distinct from its
owner or owners. Thus, accounting treats each business entity as
generating its own revenue, incurring its own expense, owing its own
assets, and owing its own debts.
4. The going concern concept: Business entities are established
with the basic assumption that they will continue to exist
indefinitely, at least as long as the owner can reasonably expect future
earnings that will yield profits. This is the reason why assets are
considered to have future economic benefits. Without this, we would not
be able to anticipate that the asset would yield any future benefit, since
we would be assuming that the business entity might not be in operation
next year.
5. The stable dollar concept:
Money is the unit of measure employed in recording financial
transactions. Knowing the money value assigned to financial
transactions enables the users of financial statements to estimate the
profitability or solvency of a business enterprise.
As the value of the dollar changes over time, accountants cannot build
useful statements with unstable units of measurements. For this
reason, they prepare financial statements on the basis of the stable
dollar concept: the value of a dollar does not change over time. They
consider the dollar of a past year to be equal in value to a current dollar.
The accounting dollar is thus assumed to be stable.
NO REFLEJAN LA INFLACIN EN LOS ESTADOS FINANCIEROS.
It shows how the owners investment has changed from the start of a
period to the end of a period. It serves as a link between the income statement
and the balance sheet, because the net income from the income statement is
recorded on the statement of owners equity and the ending balance of the
owners equity is shown on the balance sheet.
The Heading: it also has three parts:
ACCOUNTS
Different types of accounts are used by business entities to record different
types of transactions:
1. ASSET ACCOUNTS (cuentas del activo): what an entity owns and
uses to produce goods and services bienes que tengo o que necesito
para producer.
a. Increases are recorded on the DEBIT side las cuentas del
active crecen cuando se utilizan del lado del debit. O sea tengo
ms dinero.
b. Decreases are recorded on the CREDIT side las cuentas del
active disminuyen cuando se utilizan del lado del credit.
For example: Cash, Accounts Receivable/Receivables.
Accounts receivable: accounts that represent a right a
person/business has to be paid. The person doesnt know whether he is
going to be paid effectively.
-
1.
2.
3.
4.
GOING CONCERN (idea de que las empresas se crean para que tengan
perpetual existence) should be worth more on the stock exchange than
simply its net worth or net assets: assets minus liabilities.
If a company buys another one at above its net worth because of its
intangible assets, the difference in price is recorded under assets in the
balance sheet as GOODWILL (valor de la empresa. Es un active).
4. Tangible assets have substance, physical existence since we can see
them and touch them. e.g.: property, plant and equipment, vehicles,
computers. These assets have limited life and do wear out, they undergo
a DEPRECIATION. (Sp. Depreciacion). Tangible assets are recorded at
their historical cost, less accumulated depreciation charges. This gives
their net book value.
5. Liquid Assets are anything that can quickly be turned into cash. e.g.:
currrency, money held in bank accounts, checks, etc.
6. Illiquid Assets are assets that are not easily and quickly converted into
cash. e.g.: factories, land, etc.
7. Wasting assets are those which are gradually exhausted in production
and cannot be replaced. The DEPLETION of them takes place when they
are used up. No se gastan, sino que quedan sin nada.
8. Net current assets / working capital: are the excess of current
assets over current liabilities.
SUMMARY OF SOME PHOTOCOPIES
Assets, liabilities and capital
Companies publish annual balance sheets: statements for shareholders and
creditors. The bs is a document which has two halves. The total of both are
always the same, so they balance. One half shows a business's assets, which
are things owned by the company, such as factories and machine, that will
bring future economic benefits. The other half shows the company's liabilities
and its owner's capital / shareholders' equity.
Liabilities are obligations to pay other organizations or people: money that
the company owes, or will owe at a future date. e.g.: loans, taxes, future
pension payments, bills from suppliers.
Since assets are shown as debit (as the cash or capital account was debited to
purchase them), and the total must correspond with the total sum of the
credits, that is, the liabilities and capital, assets equal liabilities plus
capital. Companies now use a vertical format, with assets at the top, and
liabilities and capital below.
Shareholders' equity (owner's capital)
Shareholders' equity consist of all the money belonging to shareholders. Part
of this is share capital (the money the company raised by selling its shares).
Another part is retained earnings (profits from previous years that have not
been distributed to shareholders as dividends).
SHAREHOLDERS' EQUITY = THE COMPANY NET ASSETS
OR
SHAREHOLDERS' EQUITY = ASSETS LIABILITIES
The cash flow account / profit and loss account (not the balance sheet)
shows how much money a company has spent or received during a year.
Liabilities
Are amounts of money that a company owes, and generally divided into:
-
Current liabilities: obligations that require the use of current assets for
their payment. Thus, they represent liabilities that will be paid within a
year of the date of the balance sheet. E.g. notes payable, accounts
payable, salaries payable, deferred taxes, creditors.
Equivalences
Certified Public Accountant (CPA) US
Chartered Public Accountant (CPA) UK
Contador pblico Argentina
Accounting book: libro contable
Accounting record: registro contable
Bookkeeper: tenedor de libros
Entry: asiento (recording of a transaction under the accounting book)
Chart of accounts: plan de cuentas (it includes the name and number
of all the accounts that are going to be used in the financial statements)
Double entry accounting: sistema de doble partida
Debit: deber
Credit: haber
Account: cuenta
ASSETS = ACTIVO .
LIABILITIES = PASIVO .
Accounts receivable/receivables: cuentas a cobrar
Accounts payable/payables: cuentas a pagar
Liability accounts: cuentas del pasivo
Asset accounts: cuentas del active
Owners equity accounts/shareholders/stockholders accounts:
cuentas del patrimonio neto
Revenue accounts: cuentas de ingresos
Expense accounts: cuentas de egreso/gasto.
YEAR: ao contable/de ejercicio
To book/record an entry
General ledger: libro mayor
General journal: libro diario
Financial statements: estados constables
Auditing: auditora
Audit: auditor o auditora
Auditors oinion: dictamen del auditor lo que resuelve
Audit report: informe del auditor lo que tiene el dictamen
Qualified report: observacin del auditor en el informe.
Generally accepted accounting principles (GAAP): principios de
contabilidad generalmente aceptados (PCGA)
1 purchase; 2 purchase; 3 purchase.
Transaction
Parent company: central
Small companies: sucursales
Consolidated financial statement: all the financial statements of all
the small companies are merged. At the same time, there is one financial
statement for the parent company.
International Accounting Standard Committee (IASC) or the
International Accounting Standard Board (IASB).
International Accounting Norms (IAN): Normas Internacionales
de Contabilidad (NIC).
International Financial Reporting Standards (IASB): Normas
Internacionales de Informacin Financiera (NIIF)
Trial balance: balance de sumas y saldos
Accrual basis of accounting: mtodo de lo devengado
Cash basis of accounting: mtodo de lo percibido
Deudas incobrables: bad debts.
Bottom line: in business, bottom line is another name used for net
income. It appears on the last line of the income statement, and is
equivalent to an entitys income minus expenses for an accounting
period. It is computed as the residual of all revenues and gains over all
expenses and losses for the period.
Net income: ingreso bruto
Loss income: prdida
Book value (precio de libro) # market value (precio de mercado). Una
vez que se le saca la depreciation, queda el book value.
Make an adjustment/record an adjustment entry. Then financial
statements are prepared.